Optimism Rises Among CRE Capital Sources
Capital sources are growing more bullish about the commercial real estate outlook, reported Marcus & Millichap, Calabasas, Calif.
Optimism is growing in part because vaccine supplies are increasing, the firm said in a Capital Alert report, Optimism Rises on Vaccines, Consumer Spending. The Biden Administration now predicts sufficient vaccine supply to vaccinate every American adult by the end of May.
In addition, retail sales surged 5.3 percent in January as consumers spent $600 million from the second stimulus bill that passed late last year, the report noted. “With the White House and Democrats pushing for a third, $1.9 trillion stimulus, economists have begun raising their expectations for U.S. growth,” Marcus & Millichap said.
The Atlanta Fed recently raised its GDPNow model forecast for first-quarter real GDP growth to 10.0 percent (seasonally adjusted annual rate) from 8.8 percent on February 26.
Marcus & Millichap said $2 trillion in pent-up savings that American consumers accumulated during a year of lockdowns could also boost the recovery. But the report cautioned this could increase inflation pressure.
The report said commercial real estate lending is gaining traction as optimism grows, “with some institutions increasing allocations to the asset class and others expanding to fast-growing metros outside their traditional geographies,” it said. “We expect to see a steady stream of originations in the first half, with momentum accelerating sometime in the third quarter. Underwriting remains conservative, with higher debt coverage and lower loan-to-value ratios and lenders closely scrutinizing borrowers, tenants and leases.”
But one property type remains a concern. “[The office sector] continues to face challenges with tens of millions of employees working from home,” the report said. “Salesforce, the anchor tenant in the 61-story San Francisco tower that bears its name, last week announced that employees can work from anywhere after the pandemic. The firm, which has 54,000 workers, is the largest private employer in San Francisco. Salesforce told The Wall Street Journal that it will reduce its real estate footprint and redesign space to be more collaborative.”
But on a more positive note for the office sector, 80 percent of Salesforce employees indicated they would like to retain some connection to the office. “To increase its appeal, commercial real estate owners and investors are deploying technology to make [office] spaces cleaner and more cost-efficient,” Marcus & Millichap said. It cited a recent Deloitte survey that found nearly one-third of North American respondents are redefining their business processes, job roles and skill requirements to increase technology usage as owners plan to cut office-rental costs by 20 percent on average.
